How Do I Calculate Leverage in 1:25 and 1:100 - Leverage in Forex 1 25 and 1 100
How Leverage Increases Profits & Loses?
If you have a 1,000 dollar account with leverage 100:1 you as a trader can buy a maximum of 1 lot which is equal to $100,000 contract(1 Standard lot).
If you have a 1,000 dollar account with leverage 25:1 you as a trader can buy a maximum of 0.25 lots which is equal to 25,000 dollars contract(0.25 Standard lots).
Let us calculate profits and losses based on 2 examples of used leverage, based on $1,000 dollars trading account:
NB: This is the Leverage used not the Maximum leverage, If a online broker gives you 100:1, But if you trade 0.25 contracts then the leverage you'll use is 25:1 which isn't equal to Maximum leverage(100:1).
So the illustration referred in this guide below is talking of the leverage used based on the volume of the trade transaction which you've opened.
Example 1: (25:1 Leverage or 0.25 Lots)
For 1 lot 1 pip equals $10 dollars
If you make a profit of 100 pips, the calculation of the profit in terms of dollars is:
0.25 lots
1 pip = $2.5 dollars
100 pips = 100 * 2.5 = $250
Total= balance + profit
= 1000+ 250
= $1,250 you've just made 25% profit your account balance
If you accrue a loss of 20 pips the loss amount in dollars is
0.25 lots
1 pip = $2.5 dollars
20 pips = 20 * 2.5 = $50
Total= account balance - loss
Total= 1000 - 50
Total = $ 950 you've just lost 5% of your account balance
Example 2: ( 100:1 Leverage )
For 1 lot 1 pip equals $10 dollars
If you make a profit of 100 pips, the calculation of the profit in terms of dollars is:
1 lot
1 pip = $10 dollars
100 pips = 100 * 10 = $1000
Total= balance + profit
= 1000+ 1000
= $2,000 you've just doubled your account balance
If you make a loss of 20 pips the loss amount in dollars is
1 lot
1 pip = $10
20 pips = 20 * 10 = $200 dollars
Total= trading account balance - loss
Total= 1000 - 200
Total = $ 800 you've just lost 20 % of your account balance
From the above example you as a trader can see the more leverage you use the greater the profits or losses and less you use the lesser the profit/losses.
It is thenceforth better for you as a trade to use less leverage so that you minimize the trading risks involved. The higher the leverage ratio option used the higher the market trading risks. This is one of leverage guidelines emphasized by experienced traders - the rule and guideline of not to use more than 5:1 leverage ratio when trading.
In trading leverage rules: It is advisable to keep below 10:1 leverage which is still high, most and many experienced/professional money managers use 2:1 meaning that they trade only 2 lots for every $100,000 in their account.
To Learn More about Leverage and Margin - Study the Tutorials Listed Below:
Leverage and Margin Described
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